With the wave of online purchases engulfing India together with the rise in the use of plastic money at retail stores, RBI has come up with an innovative solution to bypass the complexities and high charges involved with opening and transacting through our normal saving account. Took birth the concept of Payment Banks to take a whip at the poor penetration of banking services in suburban and rural India by encouraging mobile transactions in Tier 2 and 3 townships.
What are Payment Banks?
Payments Banks are a blend between traditional banking and digital wallets. These are structured to work on the principle of providing “hi-tech and hi-touch” banking services. In other words, such banks will render most of their services through mobile phones, making it easier and cost efficient to operate. But there is a catch. Payment Banks are not allowed to provide loans as the regular banks do, which is actually positive for consumers. Their source of earnings will be focused on transaction charges by providing differential services through mobile phones. The incumbents will focus on volume of transactions instead of higher margins which should reduce the overall cost of transactions drastically.
Take a look at the different transactions possible on Payment Banks –
From the end of Digital Wallets –
- Recharges and Payment of Bills (Mobile, Landline, Broadband, Gas, Electricity, DTH, Transportations);
- E-Commerce Payments;
- Provide card acceptance mechanisms to third parties such as the Apple Pay.
From the end of Tradition Banks –
- Interest earning Deposits;
- Transfer and Remittance through NEFT and IMPS;
- Point of Sale Services (substituting Card Machines and ATM’s);
- Investments in schemes such PMJJBY and PMSBY;
- Issue Debit Cards and ATM cards;
- Provide forex services at charges lower than commercial banks in form of ATM Cards usable in India.
Also, it is important to note that Payment Banks cannot issue Credit Cards. Also, they are only allowed to accept up to Rs.1,00,000 per individual, though this limit is expected to be modified soon.
In 2015, RBI had extended the approval to open Payment Banks to 11 established conglomerates in India. Big players such as Aditya Birla Nuvo Group, Airtel, Reliance Industries, and Vodafone bagged the licenses. Others included Department of Post, PayTm and Cholamandalam among others.
As of today, RBI as approved the license for initiating the Payment Banks of Bharti Airtel, PayTm and Department of Post.
Norms set by Reserve Bank of India for operating the Payment Banks -
The minimum paid-up equity capital for payments banks will be Rs.100 Crores. The Payments Bank have to maintain a leverage ratio of not less than 3% (total liabilities should not exceed 33.33 times its net worth which includes the paid-up capital and reserves). These banks have to maintain a Cash Reserve Ratio with RBI (set from time to time) on its outside demand and time liabilities. Also, payment banks will be required to invest minimum 75% of its demand deposits as Statutory Liquidity Ratio with the RBI in form of Government Securities, Treasury Bills and Gold with maturity up to one year. The remaining 25% of these term deposits can be kept with other scheduled commercial banks for operational purposes and liquidity management.
Why such a move from RBI could be revolutionary?
In India, Cash on Delivery transaction accounts for 5 out of every 10 e-commerce purchases. Cash on Delivery transactions are expensive for the online sellers as instances of product returns of CoD purchases are higher by almost 35%. To encourage customers to pay electronically, online sellers often offer cash discounts or freebies. Payment Bank could act as a catalyst in solving this problem with the increase in security of transactions.
Often opening up branches in villages prove uneconomical for banks. In other cases, one branch caters the need of several villages, which results in the increase in cash transactions for businesses in small unorganized sectors. Moreover, payments and remittance to migrant labor workforce, low-income home households, and small businesses in villages usually happen in cash. With the help of Payment Banks, all such transactions can be processed digitally. Payment banks are important from the government point of view as the payment banks will play a crucial role in implementing the government’s direct benefit transfer schemes, where subsidies on healthcare, education, and gas are paid directly to beneficiaries’ accounts.
A virtual account can be opened on the basis of a unique mobile number and the Aadhar Card. The innovation is also expected to accelerate India’s journey into a cashless economy. It serves as the initial step towards organized banking in rural India.